Amid the euphoria in the cryptocurrency sector as major digital assets exceed or are on the cusp of breaking all-time records, a notable third wheel exists that isn’t exactly in a celebratory mood. Once one of the most powerful altcoins, Ripple (CCC:XRP-USD), the centralized blockchain-based asset that supposedly isn’t remains locked in a tight legal battle with the Securities and Exchange Commission.
To be sure, the matter is a confusing one for casual observers. Even those who are reasonably well-versed with cryptos find the matter perplexing and frankly obfuscating. On one hand, regulatory agencies and influential powerbrokers don’t seem to have a problem per say regarding legitimately decentralized crypto coins and tokens. Indeed, Federal Reserve Chair Jerome Powell stated that the U.S. government won’t ban cryptos.
Theoretically, this should be great news for Ripple. But the problem comes down to the SEC regarding the digital asset – essentially designed as an alternative to costly wire transfers – as a security. Of course, the contention is, why would the regulatory body do that when multiple government officials opined or implied that popular cryptos are virtual currencies and not securities?
It’s possible that the government is being dumb – a common criticism in our modern politics. However, it’s also possible that the SEC may have a point. We must all remember that the federal government can’t just throw frivolous lawsuits at suspected fraudulent entities. For one thing, reputations are at stake. If the folks pressing for the lawsuit end up making Uncle Sam look ridiculous, they may never work in Washington again.
But a more critical issue is that the Ripple lawsuit may set the tone for future regulation (or non-regulation) of cryptos. That’s why we shouldn’t dismiss the SEC’s arguments outright.
Ripple May Still be in Big Trouble
Initially, when the SEC decided to sue Ripple Labs, the originator of the XRP coin, the sentiment surrounding the asset in question was obviously dour. Its price quickly plummeted, particularly as exchanges covered their bases, refusing to broker its trades.
As Bloomberg Law pointed out, the SEC filed a complaint against popular crypto wallet and trading service Coinbase (NASDAQ:COIN). The regulatory agency alleged that Coinbase knew XRP was a security yet still “illegally” sold Ripple coins anyway. So the matter doesn’t just involve Ripple; it cuts a wide spectrum. Again, this demonstrates the SEC may have some valid arguments.
But the problem specifically facing Ripple is the nature of its blockchain. While other cryptos are clearly decentralized, with no central authority governing its supply, XRP apparently is not.
Of course, the Ripple coin proponents will argue that the asset is decentralized, with Ripple Labs asserting vigorously as such. But it’s interesting that only now the voices supporting the thesis of decentralization have aggressively made their case. Back before the lawsuit, seemingly most folks viewed XRP as a centralized asset.
For instance, a 2017 Investopedia article reported that Ripple “has no mining or miners whatsoever. Instead, transactions are powered through a ‘centralized’ blockchain to make it more reliable and fast.” A popular crypto news agency in the same year mentioned peculiarities of XRP, including a global freeze functionality that can bring the entire network to a halt.
I don’t know about you, but that kind of power sounds awfully centralized.
There’s more. A January 2018 article posed the question of whether Ripple is a wolf in sheep’s clothing. It cited among other things that “Ripple issues its token in a centralized fashion, unlike other coins which are mined and incentivized by people dedicating computing power to accumulate them.”
The Irony of Ironies
While the folks at Ripple Labs have fired back at accusations of its coin’s centralized nature, some of its counterarguments rely on derivatives of the annoying whataboutism, a common ploy of internet trolls. For instance, Ripple chief cryptographer David Schwartz mentioned the 51% attack as a means to state that decentralized protocols can be defeated and become centralized.
First, 51% attacks are possible in major cryptos but largely theoretical. Second, that blockchain networks can be rendered centralized doesn’t address the point of whether Ripple itself designed its XRP protocol as a centralized platform or not. Again, it’s a whataboutism and a silly one at that because it draws attention to XRP’s distinct nature.
Further, crypto researchers have made their case about why Ripple’s claims of its decentralization are misleading. And that’s the irony of this whole situation. True crypto advocates largely blasted Ripple because of its centralized nature. But when the SEC asserted that XRP is a security because of the underlying centralization, suddenly, many are now claiming that XRP was decentralized all along!
Well, a web search of specific date ranges exposes this broader hypocrisy. And because of that, Ripple isn’t out of the woods. As a holder of XRP, I do wish the company well in its fight against the SEC. But let’s not celebrate too early as the agency still owns a very powerful fundamental argument, an argument that legions of crypto fans used to discredit Ripple before the lawsuit.
On the date of publication, Josh Enomoto held a LONG position in XRP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.